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No-load Trend

Mutual funds are looking to give investors a much-needed value addition by reducing costs

A trend that is increasingly catching on in the mutual fund industry is all about empowering the investor. Asset management companies (AMCs) are increasingly resorting to a feature that will carry no entry or exit loads, giving investors the opportunity to reduce costs and increase gains.

In January 2008, the Securities and Exchange Board of India (SEBI) unveiled a new set of regulations whereby it mandated that no entry load be charged to investors who invest directly through the AMCs. This was a boon for investors as a significant portion of the cost could be reduced if the middlemen were bypassed.

Though a lot of index funds do not charge any entry load, only a few diversified equity funds in India are no-load - Quantum Long Term Equity Fund, Tata Contra, JM Nifty Plus and HDFC Index Sensex Plus.

Load means a charge, either on entry into or exit from a mutual fund, to be paid by investors. The entry load is charged to investors to meet the selling expenses i.e. the distributors’ commission. It is paid over and above the NAV of the fund. For example, if the NAV is 100, and an entry load of 2.25% is applicable, then the purchase price for the investor will be Rs 102.25. Apart from the entry load, yearly trail commissions are paid to the distributors, which is a percentage of the fund value. On the other hand, an exit load is chargeable to investors if they redeem their investments within a stipulated period of time from the date of allotment of units. This load is charged mainly to deter investors from redeeming their investments within a short period of time. In effect, what Edelweiss has done is to give the investor the decision-making power while choosing which option to go for.

Edelweiss Mutual Fund is looking to chart this territory too with its new fund offer (NFO)—Edelweiss Diversified Growth Equity (E.D.G.E.) Fund. What is unique about the scheme is regarding the load that is charged from investors. Under Edelweiss’ E.D.G.E. fund concept, based on this trend, there are three plans being offered: Plan A, Plan B and Plan C. Investments under Plan A are subject to an entry load of 2.25%, whereas investments under Plan B and Plan C are not although the minimum application amount is higher for them. Which, in effect, means that the purchase price will be the same as NAV.

An additional facility, Right to Accumulation (RoA), has also been offered whereby the exit load under the respective plans will be relaxed or removed as per the terms of the plan. For this, investors should fill a Statement of Intention (SoI) for investing a total sum of Rs 1 crore within the discounting days (currently, 10 business days) and then remain invested for the discounting cycle which varies from plan to plan.

Another fund house that has charted this territory is Deutsche MF, which has introduced no load plans, or 'NL Plans', under its two diversified equity funds—DWS Alpha Equity and DWS Investment Opportunity.

Currently, 253 of 342 equity funds charge an entry load of 2.25%. Apart from these, 22 funds are charging an entry load of 2.50% or more--Fidelity Mutual Fund and Reliance NRI Equity Fund are charging 3% entry load, which is currently the highest in the industry. This move could very well have cemented the trend of offering higher commissions to increase sales of mutual fund schemes.

Now, moving even further from its last stated position on the issue, and to add to the celebrations in the future, SEBI is proposing to transfer the decision-making on entry loads to the investors and distributors. If the new regulation comes into effect, a variable entry load ranging from 0 to 6% will be charged. The investor and the agent will themselves agree upon a commission and a separate payment will be made towards the same.

These are interesting moves in the mutual fund industry. Surely, investors are going to be the key beneficiaries as it may make investing really cost effective.